How does the economic policy uncertainty affect the relationship between financial slack and firm performance in emerging countries?

Abstract

This study investigates the moderating effect of economic policy uncertainty (EPU) on the relationship between slack resources and firm performance in emerging countries. By using 47,523 firm-year observations from seven emerging market economies through the period of 2010-2018, the results show an inverse U-shaped relationship between slack resources and firm performance. The findings also demonstrate that EPU acts as a negative moderator for the slack-performance relationship. In high EPU environments, the marginal benefit from one additional unit of slack is smaller relative to low EPU environments. This study contributes to the slack resources-firm performance literature by emphasizing the role of the broader external environment as a moderator.